Operating lease example
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Introduction to ASC 842
In 2019, the latest FASB standard on lease accounting, ASC 842 (ASU 2018-11), went into effect for most public companies. Other entities, including private companies, were granted a later adoption date, which has now been extended to years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Among other requirements, ASC 842 declared that most leases need to be capitalized and recorded on to the balance sheet.
The financial statement fraud in Enron, WorldCom and others were drivers to the creation of the lease accounting standard. ASC 842 closed the loophole which allowed corporations to hide certain assets and liabilities off-balance sheet. Under the standard, companies are required to capitalize most leases on the balance sheet — reporting them as right-of-use assets and lease liabilities. As a result of the shift, capitalized lease obligations face increased auditor scrutiny, pushing companies to focus on ensuring accuracy and completeness of what they report as well as leading to greater transparency and comparability of financial statements.
The following is a table showing when private companies need to transition to the new rules: Early adoption is permitted for all organizations, but very few major public companies elected to early adopt. It is expected that private companies will follow the same pattern. This is primarily because the transition process is a huge undertaking and ongoing compliance requires new processes, controls and often FTEs. Organizations with sizable lease portfolios should make use of all the time between now and the deadline to identify leases, extract data, input data into a lease accounting system, and test the system under the standard’s rules, among other steps.
Check how your leases are classified under ASC 842 using this lease classification decision tree.
ASC 842 lease
For companies who want to achieve and maintain compliance with the lease accounting standard